It is very hard to address these issues without getting
wonky, but I’ll start by saying that economists who study tax questions agree
that taxes on sales (gross receipts, turnover, value-added, retail-sales, etc.)
are for the most part shifted forward to consumers. We would also insist that
this is not necessarily the case with all of the taxes that businesses remit to
the government. For examples, the incidence of taxes on property, business income
(profit or earnings), payroll, or the extraction of raw materials, tends to
fall on business owners or is shifted back to factor suppliers.

Nevertheless, M-97 is different from any known sales or
gross receipts tax. Typical sales taxes discriminate along jurisdictional lines
or by type of product. M-97 proposes to discriminate on the basis of the
seller’s identity, levying the tax ONLY on the sales of certain C-corporations,
those with Oregon sales in excess of $25 million. The LRO tried to deal with
this issue by making the portion of the tax that would be shifted forward to
consumers proportional to the concentration of affected businesses in each class
of business, so that, if big C-corps represented 50 percent of sales in that
market segment, only 25 percent of the tax would be shifted forward, 90 percent
of sales = 80 percent shifted, and 100 percent = all. Because affected firms
tend to dominate the business categories in which they operate, the LRO
concluded that overall more than 60 percent of the tax take of ≥$3 billion
would be shifted forward from business owners to consumers.

Maybe this is an overestimate, maybe even a big one. Perhaps,
most of the burden of M-97 really will be born by the shareholders of extremely
large, mostly out of state companies or even out of state consumers. We
really cannot know for sure until M-97 is put into effect – which is in my
opinion a bug not a feature. But on theoretical grounds, it can be argued with some
justification that the LRO has, if anything, underestimated the amount of
forward shifting M-97 will induce. In imperfectly competitive markets,
economists usually assume that market leaders are price setters: that, when
their cost of goods-sold increases, they will raise their prices and, depending
on their market power, the increase may be less than the cost increase, but may
also be MORE. Since market power is usually assumed to be a function of
concentration, this is essentially the logic that underlies the LRO’s very
reasonable position.

What the LRO’s position rules out is the possibility of
over-shifting and, especially, over-shifting due to the behavior of the
competitive fringe, in this instance the businesses not facing the M-97 induced
cost increase. The standard assumption in competitive analysis is not, as
proposed by M-97 supporters, that they will undercut the price of the dominant
businesses in the area, but will, instead, tend to meet the price increase of
the market leaders. Where this is the case, the price increase borne by
consumers as a result of a tax may and, in some cases, will exceed the tax
take.

Moreover, this is generally what the evidence shows happens.
The closest analogy to M-97, that I know of, occurs at borders, where one
jurisdiction has a higher embedded excise than another, typically on things
like motor fuels, alcohol, or tobacco products. Not surprisingly, prices just
across the border in the higher taxing jurisdiction tend to be higher on
average than in low-tax jurisdiction, but not by as much as in the rest of that
jurisdiction, where various studies show that between 80 and 400 percent of the
tax take tends to be recouped by businesses. What might seem surprising,
however, is that prices just across the border in the low-tax jurisdiction are
also typically higher than elsewhere in that jurisdiction – and, of course,
retail booze, cigarettes, and gas sales are probably characterized by more
price taking than one is likely to see in a lot of affected business segments
under M-97.

My point is not that the LRO has underestimated the amount
of tax shifting likely to occur under M-97. Rather, they have made a prudent,
middle-of-the-road estimate, which is their job. The extreme estimates? They
come from M-97’s supporters, and are based neither on economic theory nor
independent evidence.

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This blog seeks to comment on economic issues that matter to the state of Oregon. These issues may be local, state or national but in some way matter to Oregon and Oregonians. The goal of this blog is to eschew politics as much as possible and give an economist's perspective on economics and public policy as it relates to Oregon.

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